One of the most important keys to keep in mind with your development – is to consider the Property Market in general and its cyclical timing.
Sometimes the market is up and sometimes the market is fairly flat. So how do the experienced developers make a profit regardless of where the Market is?
Development projects have a lot of flexibility if purchased correctly. The development could be sold Subject to receiving the town planning (Development Approval) permit, could be sold once the planning permit is achieved, could be sold once the project is completed or if the finances permit – the entire project could be kept on the rental market and sold when the market is buoyant.
Experienced property developers understand this and understand the value that is added through the Development Approvals and prepare for the exit scenario ahead of purchasing the project.
So what typically happens is that they have to decide upfront at what stage they will sell the property, whether they’ll get the permit and sell it before they start to build, or they’ll actually sell it at the completion of the project.
Key Points about the Market:
- Developers must consider and understand the market & overall timing of the cycle
- Consider Exit Scenarios in the Feasibility Study Ahead of Starting the Project
- Property Market is cyclical and will be up and down as the past has shown
- Demand and Supply of property on the market creates the fluctuations
- Development Approvals (Town Planning) permit provides flexibility to developers to exit at their preferred time
3 Factors to Determine How You Will Need to Respond to the Market Situation to Optimise Profitability of Your Project
Market situation – is the current market strengthening or weakening? Is there an undersupply or an oversupply of projects on the go?
What will the situation be in 12 months time when the permit is likely to be achieved? Will it be a good time to start building the project or sell the project because permits will be at a premium?
What is your personal situation like – if the worst case scenario is that when the TP is approved, but you are not able to build – are you in a position to hold on to the project? And if you will need to sell it – is it going to be a good time to sell or will you have to sell the project at any price?
Typically for small residential developments – there is an income from the property in the way of rent, however with commercial properties it is not quite so easy because if the property is rented out – then it is likely to be on a longer term than 12 months.
Currently I’m working with an experienced property developer who is going through a project in Clifton Hill in Melbourne, Victoria. This development started 2 years ago when the developer purchased the project with the view to subdivide an existing building off the site and then put together a planning approvals on the land behind the existing building which was heritage listed and could not be easily re-developed.
Now that the subdivision permit is achieved – the existing building has been further subdivided and sold off as parts to maximise return. In the meantime, the other component is in process of receiving development approvals for a 21 apartment and 4 retail outlets project. As the market currently is a bit weak for off-the-plan sales, the development is for sale subject to Planning approvals. This allows the developer flexibility and to sell the project at a slight discount, but come out of the overall project with a profit.
Just like a ship sailing in the wind has to adjust its sails, same goes for the developers in the property market – Timing is everything!